If you don’t know what SXSW stands for, don’t worry. I wouldn’t have known a few years ago either.

SXSW – South by Southwest – started in Austin, Texas in the late 1980s as a small get-together that, to the surprise of its organizers, attracted 700 people in its first year. It is now a massive technology conference and film/music/comedy festival, with a few hundred thousand people in attendance this year. Just to give you an idea of the kind of pull SXSW has, Tesla’s Elon Musk made a surprise appearance, Steven Spielberg is here screening “Ready Player One,” Arnold Schwarzenegger is here being Arnold Schwarzenegger (he requires no hyperlink), the Mayor of New York is sharing a stage with three of his fellow mayors, and there are scores of bands that I’ve never heard of because I’m not young enough any more.

Since goodcounsel is actively engaged with Chicago technology companies, I am here at SXSW to keep abreast of emerging developments in the interactive world. (Spoiler alert: the future is here!) Plus, I wanted to try Austin’s legendary barbeque.

And so, here I am, ready to talk tech with everyone and to get my fingers full of barbeque sauce. Over the next several posts, I’ll do my best to give you a flavor of what I am encountering here. (If you want barbeque flavor, you’ll have to come yourself.)

goodcounsel, in its typical role of general counsel to our early-stage clients, is heavily involved in contract drafting and negotiation. In this post we’d like to address the sometimes neglected “dispute resolution” provision that is often in the boilerplate at the end of contracts. (You know, that legal mumbo-jumbo you have always ignored.)No one wants to think too much about dispute resolution, because no one wants to think there will be disputes. And, anyway, who even knows what a dispute will be about? All true, but there are important choices to be made about how disputes are handled, and they can make a big difference when parties cannot resolve their issues on their own.

Just about everyone can relate to the challenge of trying to get work done in the face of an endless torrent of emails and the expectations of constant availability and immediate response. Yet the reality is that this situation is incompatible with completing work that requires extended focus (which is to say, most work).

We realized that we had to try something. Thus, from time to time, you might email someone at goodcounsel and receive an automatic response like this:

I often represent startup clients in negotiations with counsel for large companies, and strangely, while the caliber of their attorneys is generally high, the quality of their contract forms is, on average, awful.

It’s crucially important for a boutique corporate and startup law firm like ours to have access to a network of high-caliber practitioners in different geographies or with specialized knowledge our clients need. Consequently, I am pleased to be a member of Select Counsel, a nationwide network of solo and small-firm attorneys with top-notch credentials and capabilities, which formally launched this week.

You can read more here on the website, or download the launch announcement.

We awoke recently to congratulatory email messages from colleagues and friends. “Above the Law,” a notable online publication that covers the legal scene, published an article entitled “The Loop Elite: The Go-To Law Firms of Chicago,” identifying the top law firms in Chicago across 21 different categories, and there we were – named the “Best Firm For Startups.” Read the rest of this entry »

For those who have not yet encountered this particular creature: blockchain is a distributed online ledger of transactions made possible by internet protocols and strong cryptography. It is best known for being the ledger system for transactions in Bitcoin, the most widely used cryptocurrency, but blockchain is beginning to enjoy wider visibility as the number of applications that incorporate it – from payment systems to online storage and beyond – explodes.

goodcounsel represents a wide range of startups, many of which have raised capital from angel investors. How do these investments perform? It is difficult for us to generalize from our limited view of the landscape. We don’t have a large enough sample size (or the expertise, to be frank) to make broad judgments.

Fortunately, there are organizations who compile data and study issues like this. One of them, an organization called the Angel Resource Institute, recently issued a report called “Tracking Angel Returns.” You can read it yourself, here, but the upshot, based on a combined data set of 245 completed investments:

The overall cash on cash multiple is 2.5X, with an average holding period of 4.5 years. This equates to an Internal Rate of Return (IRR) of 22%, which is obviously very good.

Failure rates, not surprisingly, are high: 70%.

Of the non-failures, a mere 10% generated 85% of all cash, which again, is not completely surprising. This explains why smart early-stage investors typically pursue a portfolio strategy.

This suggests that a broad portfolio of angel investments offers attractive performance; by the same token, making a single, undiversified investment could be risky risky (true of a single investment in any asset class).

What factors go into making the successful startup? We’ll explore that in a separate post.

Fred Wilson (always worth reading) has once again posted some views in the (perhaps a bit tired) debate about whether entrepreneurs should raise seed financing using convertible notes (or their close cousins, SAFEs) or priced equity. (Wilson’s original post was all the way back in August 2010.) Amazingly, though posted only a month ago, there are 98 comment threads (and the comments are closed, otherwise there would surely be more).

Wilson, though a venture capital investor, makes the argument that convertible notes and SAFEs (which are more or less identical for purposes of this conversation) are bad for thefounders. I have no reason to think that he’s being insincere or self-serving; he has a good reputation, and he makes some valid points. At the same time, one can find any number of people arguing that convertible notes are a bad deal for investors, and no investor ought to invest through one. Here’s a recent example, from David Cummings in Atlanta. (Don’t know him, but his bio is impressive enough.)

Who to believe?

I’ve posted on this subject before. Re-reading that now, years later, I still agree with myself (Hooray!). Below is a more concise take, as posted in a comment to the Cummings thread I wrote today:

All of these posts [pro and con] tend to ignore the compelling reasons that entrepreneurs turn to convertible notes.

Note documentation is easy to understand (the number of moving parts is quite low) and, most importantly, relatively inexpensive. By contrast, doing an equity round generally involves changes to a company’s certificate of incorporation and — if any of the standard document sets are used (most of which I find to be investor-favorable to a greater or lesser degree) — three or four additional, long documents will also be involved. The legal fees easily get to $20K or more, when both company and investor counsel are included.

Personally, I’ve done much lighter equity documents for startups, quite inexpensively, but these are for seed rounds, where the company tends to be in the driver’s seat and a lot of terms can be left out. I am sure that if a VC investor were involved, they would find them lacking (in their view) sufficient protections.

The problem with equity rounds is complexity and cost, and until those issues are addressed, companies will keep using notes and SAFEs, even if in some cases they have terms that may be less than ideal for one side or the other.

In the comments to Wilson’s post, you will find heavy-duty debate about whether or under what scenarios the dilution mathematics of convertible notes works out better for investors or founders. (Spoiler: it depends.) I simply feel that my take reflects a more practical perspective on why people go for convertible notes. It’s generally not a decision based upon intensive spreadsheet work using a variety of assumptions about company growth and future rounds and valuations; it’s about how to get the round done and the money in the door, quickly and economically. That seems to trump all other considerations.

In a legal and business career that spans more years than I care to admit, I’ve worn many hats (some of them at the same time): entrepreneur, company founder, early employee, investor, and attorney. Understanding an issue from multiple directions means that, perhaps unusually among lawyers, we typically counsel our startup company clients to implement legal terms that, while not representing the most aggressive possible stance, represent a fair one – one that we feel will ultimately result in the best outcome for all parties, including our client. Read the rest of this entry »